Fed not expected to announce the start of the balance sheet reductions next week – Wells Fargo

A rate hike from the Federal Reserve next week is widely expected, even despite the recent turmoil across financial markets. According to analysts at Wells Fargo, the chance of a 50 bps interest rate hike “has fallen tremendously given the souring outlook to growth amid higher commodity prices.” They believe it would take a combination of a rapprochement between Western countries and Russia along with the February CPI beating already lofty expectations for the FOMC to surprise markets with a 50 bps move.

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“Russia's invasion of Ukraine has added even more uncertainty to the U.S. monetary policy outlook. Despite the geopolitical developments, we still expect the FOMC will hike the federal funds rate by 25 bps at the conclusion of its March 15-16 meeting. A near-complete labor market recovery and inflation that is well-above the central bank's target make the case clear for beginning the tightening cycle. We would be very surprised by a 50 bps hike or no hike at all, but there are tail-risk scenarios where these possibilities could become reality.”

“We do not expect the FOMC to announce the start of balance sheet reductions at the March 16 meeting. Numerous policymakers have made clear that the Fed will only begin reducing the size of its balance sheet after rate hikes have commenced. That said, it is clear that discussions have ramped up in recent months regarding the timing, size and composition of balance sheet shrinkage. We do not anticipate any major new balance sheet policies in the meeting materials, and we suspect Chair Powell's press conference will simply reinforce that the expectation that the Federal Reserve will begin reducing its Treasury and mortgage-backed security holdings at some point in the near future.”